England fell to their first defeat under new coach Andy Robinson after Australia ran out narrow winners in a thrilling Test at Twickenham.
Australia, assisted by some woeful goal-kicking from England, powered into a 12-0 lead with tries by Jeremy Paul and Chris Latham.
A second-half fightback saw England take the lead with tries from Lewis Moody, Josh Lewsey and Mark Cueto.
But two late Matt Giteau penalties won the match for Australia.
England - who went through three goal-kickers - ultimately paid the price for a succession of wayward shots at goal.
A promising attacking platform - after an astute Charlie Hodgson kick through - was squandered when Henry Paul coughed up possession, the first mistake of a miserable afternoon for the rugby league convert.
Aggressive Australia defence, with George Smith particularly prominent, saw a disjointed England attempt to force unnecessary passes and slowly hand the initiative to Australia.
A needless knock-on from England skipper Jason Robinson deep in his own 22 proved costly as Australia set up camp before opening the scoring through Jeremy Paul.
Giteau's magical break took him past Joe Worsley's tackle, before committing Jason Robinson and giving a perfectly-timed pass to Paul.
Flatley composed himself before sending the conversion over.
Andy Robinson then made a major tactical call, bringing on Will Greenwood for the misfiring Henry Paul after just 24 minutes.
Giteau gave a classy display of goal-kicking under pressure
But it was Australia who scored next as Latham powered through a Lewsey tackle to touch down on the right.
A perfectly-executed line-out provided quick ball off the top, and allowed centre Morgan Turinui to set the ball up in front of the posts.
Giteau's delightful flat pass gave Latham enough room to go through Lewsey and Mike Tindall's tackles.
England upped the tempo and started to find some fluency, but two missed kicks from Hodgson - who scored 27 points in the win over South Africa last week - let Australia off the hook.
The first points of the second half went Australia's way as Giteau's long-range penalty put them into a commanding 15-0 lead.
England's fightback finally began on 48 minutes when Moody was driven over for a desperately-needed try.
The home side turned down three possible kicks at goal and were rewarded as a catch and drive from the line-out, supported by several backs, saw them power over the line.
Another two points went begging though as Gomarsall, stepping in as goal-kicker, sent his conversion effort wide.
The score acted as a wake-up call for England as their forwards began to exert more influence.
Another string of kickable penalties were turned down, and the decision again paid dividends with Lewsey's 60th-minute try.
A forward drive committed the Australia defence, and Lewsey simply took the ball off the back of the maul and sprinted over a totally unguarded blindside.
Tindall, England's third kicker, added the extras to cut the gap.
Soon after, a classic back move saw the ball flow through the hands of Hodgson, Lewsey and Robinson to allow Cueto to go over for his fourth try in three Tests.
Tindall again added the conversion to give England the lead.
Australia were far from finished though, and battled back upfield to force two penalties - the second after a stupid late tackle by Gomarsall - both of which Giteau stroked over comfortably.
A late England onslaught had the Twickenham crowd on their feet, but the Australia defence held firm.
England: J Robinson (capt); M Cueto, H Paul, M Tindall, J Lewsey; C Hodgson, A Gomarsall; G Rowntree, S Thompson, J White, D Grewcock, S Borthwick, J Worsley, L Moody, M Corry.
Replacements: A Titterrell, A Sheridan, B Kay, A Hazell, H Ellis, W Greenwood, B Cohen.
Australia: C Latham; W Sailor, M Turinui, M Giteau, L Tuqiri; E Flatley, G Gregan (capt); B Young, J Paul, A Baxter, J Harrison, D Vickerman, G Smith, P Waugh, D Lyons.
Replacements: B Cannon, M Dunning, R Samo, S Hoiles, M Henjak, D Mitchell, M Rogers.